A New Way to Invest in Infrastructure

Barclays ( BCS) has come out with a new exchange-traded fund, the iShares S&P Global Infrastructure Index Fund ( IGF), that is definitely worth considering.

Infrastructure is an asset class that has interested me for some time. I believe it is crucial that a diversified portfolio have some exposure to toll roads and airports around the world because they are likely to hold up well in a U.S. slowdown.

I have written about U.S.-listed Macquarie Infrastructure Trust ( MIC) several times in the last couple of years, touting it as my favorite product in the space, but IGF also seems compelling.

It's probably a better way to invest in the sector than another ETF that debuted recently, the SPDR FTSE/Macquarie Global Infrastructure 100 ETF ( GII).

I tend to think that infrastructure consists of two big sub groups. First, builders such as Foster Wheeler ( FWLT) offer a lot of growth potential, have a high correlation to the stock market and experience a lot of volatility. Second, "maintainers" (as in maintaining a way of life) such as Auckland Airport ( AIA.NZ) are steadier in price, have a low correlation to the stock market and usually offer some yield.

Utilities are often maintainers. GII is heavy weighted toward utilities, at 87%. By comparison, IGF takes a much more balanced approach, allocating 40% to utilities, 22% to highways and rails, 20% to energy storage and transportation (think pipelines), 10% to airports (a lot of airports around the world are listed on public markets) and 8.3% to public ports.

Infrastructure products offer security. The demand-driven buildup and modernization of water systems, highways, electric grids and public transportation will continue regardless of stock-market and economic cycles.

This does not mean infrastructure stocks will be immune to a bear market. But if the demand driving these businesses holds steady, these stocks will hold up better in a bear market. Fundamentally speaking, a slowdown in the U.S. won't make the air or water in China any cleaner.

As for some nuts and bolts, the IGF fund will have a 0.48% expense ratio. On a call to iShares, I learned they do not know what the yield will be (this is a gripe for a different day). The country breakdown favors the U.S. at 23%, Australia at 9%, a lot of countries in Western Europe for a total of around 8%, Hong Kong and Canada at 7% each and several others with enough weight to influence the fund.

One little quirk: IGF has exposure to 10 countries that each have less than a 1% weighting. I do not think any of these countries can move the needle in terms of performance, but they likely do make the fund more expensive than it might otherwise be.

Looking under the hood, I believe that IGF is the better choice than GII for investors who prefer not to hold individual stocks. As the segment mix above shows, IGF allocates more to mundane assets such as toll roads, which I think offer more diversification.

For example, IGF has a heavier weighting than GII in toll roads including Abertis ( ABFOF) from Spain, TransUrban ( TRAUF) and Macquarie Infrastructure Group ( MCQRF) from Australia, along with Macquarie Airports ( MQRSF) and Fraport ( FPRUF). This should help IGF hold up better during downturns and reduce its correlation to U.S. stocks.

Toll roads and airports in other countries are not vulnerable to a U.S. slowdown, which is what owning this asset class is all about. It's possible that a U.S. slowdown could impact these stocks indirectly; perhaps these countries would export less, leading to a slight reduction in traffic. But traffic on these roads and runways is largely driven by domestic demand. There are 1000 new cars purchased in China every day, and those new-car buyers are going to go on the highway. IGF has two Chinese toll road stocks in it.

At the time of publication, Nusbaum and a client were long MIC, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.